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Amazon becomes latest EU target in tax probe

European Union officials contend that a Luxembourg ruling from 2003 could represent an improper tax shelter and thus require Amazon to pay back taxes.

Declan McCullagh/CNET

Amazon is under investigation over a deal with the Luxembourg government that has allegedly allowed to company to pay less in taxes to other European countries.

The European Union's European Commission on Tuesday launched an "in-depth investigation" into Amazon and Luxembourg over a "tax ruling" from 2003.

"It is well known that some multinationals are using tax planning reduce their global tax burden, eroding tax bases in EU Member States," the European Commission wrote in a statement on Tuesday. "We are looking at whether selective tax advantages have been granted to a particular company."

The investigation is nearly identical to the one impacting Apple in Ireland. In that case, the European Union is investigating whether a special deal between Apple and Ireland's government allows the company to sidestep much of its tax liability. The country's corporate tax rate is 12.5 percent, but Apple pays less than 2 percent in taxes in Ireland. If the European Union decides that this is improper, then Apple could be forced to pay billions of euros in unpaid taxes stretching back 10 years.

A similar scenario could play out with Amazon, if the European Union finds that the agreement between Luxembourg and the e-commerce giant allows the company to safeguard profits and improperly limit tax liability.

"The ruling we are looking at concerns Amazon's subsidiary in Luxembourg, which records most of the group's European profits," the Commission wrote. "This company pays a royalty to another entity [that is] based in Luxembourg but not subject to corporate taxation in Luxembourg. Today we observe that through this mechanism most European profits of Amazon are recorded in Luxembourg but are not taxed there."

The Commission added that the royalty reducing Amazon's tax liability "might not be in line with market conditions" and that "Luxembourg's tax authorities agreed to limit the proportion of Amazon's turnover that is being taxed in Luxembourg whatever the profit that Amazon is making."

If it does find that the deal is improper, the company could face a significant bills for back taxes.

The European Union has taken a hard line on alleged tax shelters. In addition to taking on Amazon and Apple, the regulatory body has also questioned tax deals for Starbucks in the Netherlands and for Fiat in Luxembourg.

Amazon did not immediately respond to a request for comment.